This post is inspired by a recent discussion I had with a reader of this blog. When I tried to tell him why doing a monthly SIP is an inherently flawed concept he quite agreed with me. However, he came back the next day and said that he read somewhere that if one invested in the lowest NAV of the month, the returns were not significantly different etc. The reader, like most investors, unfortunately made the mistake of thinking that one had to invest every month.
Try to think a little deeper as to why the monthly investment cycle has become the vogue with all investors. Many will say it is because we get our salaries monthly, so it is easier to align the investment cycle to this cash inflow. While there is some logic to this, not all investors are salaried people. There are many who are in business and there are others who are professionals. For these people the cash inflow is not time regulated but they still end up investing monthly. One of the reasons I can think of is the push from MF distributors and banks that you should invest quickly after you get the money, lest you spend it in other ways. This makes no sense to me as your spending will normally be known and even for discretionary expenses most people will have a plan.
The other reason people will give you is that, once invested, your money is working for you. That would indeed be a nice thing but is it true? I mean, people doing monthly SIP over the last year have invested their money at much higher NAV s than their funds are at now – so, how exactly is their money working for them. Surely a loss of capital is not a good way for your money to work? Make no mistake – the only people who benefit from your equity investments monthly are the MF distributors, Banks and other intermediaries who have a vested commercial interest in your getting into this investment habit. In most cases you do not benefit from it and if at all you do, it is by pure chance.
So should you completely junk the monthly investment habit – not so, as for certain situations it makes a great deal of sense. Some people may not be able to put the entire PPF contribution yearly and want to do so monthly. This makes sense as the money you put in every month, definitely starts working for you immediately. In general for debt products, the earlier you are able to put the money the better for you. The only change to this maxim will be when there is a definite possibility of an interest rate hike in the short term. In such a situation you may want to hold on to making a debt investment.
Equity buying is a completely different kettle of fish and there is no real advantage of buying it at a regular frequency. To say that since we do not know when is the BEST time to buy we should therefore buy it blindly without any consideration, is really not logical at all. Putting 10000 Rs in a large cap fund when Nifty is at 8500 versus when it is at 7500 are two very different things. Such buying mistakes over a long period of 15 or more years will only make sure that you end up with far less money than you could have otherwise.
So let us get down to the crux of the issue. If you had to invest 10000 per month in a large cap fund in 2016, how should you go about it? Follow the below approach:-
- Understand that there are no immediate short or medium term triggers for the Nifty and for large periods it will be in the 7300 to 7700 range.
- For every downward journey, wait till it reaches 7300 or thereabout and then put money in your fund. If it reaches 7400 and then starts an up move then put money at that level.
- You need to make only 4-6 buys in the year, so you can afford to be patient.
- Your aim is NOT to buy at the lowest point of Nifty, just to make sure that you are buying at reasonable levels AND not buying at completely wrong levels.
- I have already put 40 % of my large cap allocation in January and will put another 20 % should the Nifty get down to 7300 or below levels just after the budget.
You can work out similar strategies for other categories of funds by fixing the base levels for those indices. Should you be doing this or stick to the approach of monthly SIP which is completely misaligned with the concept of buying equity? Your money, so your choice too.